By Shuli Ren

The price reaction seems unnecessary, noted J.P. Morgan. The bank estimates that AmBev will need to raise its beer prices by about 5% to offset the increases in taxes, which translates to around 3% decrease in sales volume. As a result, AmBev’s 2014 and 2015 earnings per share will fall by 2% and 3% respectively, lower than the 5.1% price drop yesterday.

Intelligent price increases is a skill for which we give management the benefit of the doubt. This potential decline may also be mitigated by AmBev’s branding power, SKU flexibility and additional consumption occasions (sport events).

J.P. Morgan has a Buy rating on AmBev, with $7.9 price target.

Investors may have been spooked that the beverage tax came earlier than the expected October time frame. In addition, this is the second beverage tax hike this year, as the Brazilian government attempts to manage a deteriorating fiscal account ahead of the October elections.

About Emerging Markets Daily

Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. Barrons.com’s Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools. She studies multiple languages and photography.